Newspaper headlines tend to give much more space to the buy-to-let residential market than the commercial property market, but over recent years the commercial property market in the UK (and other countries) has been quietly doing very well for its investors. The key question for investors is whether or not this will continue. Here are some points to consider.
- The stamp duty surcharge
At current time it’s rather early to say what effect, if any, the stamp duty surcharge will have on the market for buy-to-let residential property. On the one hand, it increases up-front costs to potential landlords, essentially acting as a handicap as compared to those buying property as their main home. On the other hand, it does nothing whatsoever to make it easier for potential buyers to get a mortgage. If mortgage lending is constrained, the housing market will effectively be restricted to the cash-rich, i.e. those who can afford to buy property without a mortgage or, as a minimum, those who can afford to put down hefty deposits. This will ensure demand in the rental market and so the end result of the surcharge may simply be to increase rents as landlords absorb the up-front cost and pass it on to their tenants. At the same time, some investors may prefer simply to bypass the whole issue and opt for commercial property, which is outside of this regulation.
- Uncertainty over further changes to residential buy-to-let
The stamp duty surcharge was nothing to do with austerity per se; it was a response to the perceived imbalance between a “younger generation” of first-time buyers and an “older generation” of cash-rich investors. Hence it is arguably best viewed not as a tax, which may be repealed if economic circumstances warrant it, but a means of trying to manage the housing market and helping to finance schemes such as the equity loan scheme for new-build property in England. The issue of young people getting onto the housing ladder is unlikely to go away any time soon and therefore it is entirely within the possibility that any government will take further action to tilt the residential housing market in favour of younger buyers and against investors. This could favour investment in commercial property.
- Pensions freedoms
Somewhat ironically, another hot topic is the need for individuals to save for their old age and to alleviate their need to rely on the state in general and the state pension in particular. Up until recent years, the advantage of tax relief on pensions had to be set against the constraint that most of the accumulated pension pot had to be used to buy an annuity. Now, however, pensions freedoms allow seniors the opportunity to use their pension pot as they see fit and that means that retirees who have saved diligently could end up with substantial pension pots, which could form a very good basis for property investment. Pensioners looking to stay out of the politically-sensitive area of residential buy-to-let may well prefer to look at commercial property investment instead.
- Increased awareness of the benefits of diversification
Successful investing is often about striking a balance between not putting all one’s eggs in one basket (formally known as diversification) and spreading investment funds too thinly with the result that the gains from successful investments are minimised due to holding a relatively small position in them. Since everybody needs a place to live, it’s a fairly safe assumption that investors will already be familiar with the residential property market and buy-to-let and are likely to investigate this area as their first port of call, but as they develop more experience they may well develop more of an interest in the commercial property market as a means to diversify their portfolio.